It’s been an exciting last few weeks in the gold mining sector with lots of M&A activity and a steady increase in most share prices across the sector. Meanwhile, the gold price has remained relatively stable. In Energy & Gold’s December conversation with 321gold founder Bob Moriarty we cast a wide net across the junior gold sector and discuss nearly a dozen companies. Bob also explains why we are entering a gold bull market, the likes of which nobody has seen in their lifetime…
Goldfinger: So since we last spoke, you told me about the trip to Novo in Australia, the stock is up really impressively since then (~50%). And I know it’s based upon some news about ore sorting. Can you tell us a little about why that news was so important, and what you see for Novo over the coming months?
Bob Moriarty: Yeah, that’s a really good question. Novo is made up of three uniquely different projects. They’ve got a fairly conventional hard rock project at Beaton Creek with just short of a million ounces of gold at a good grade. They these very nuggety gold hard rock at Karratha that’s impossible to measure and then they’ve got the near surface nuggety gold in alluvials at Egina. If there was water at Egina the alluvials would have been mined out a hundred years ago. But Egina is either under water for a short period during the monsoon season or boiling hot and dry. So you’ve got to mine it with some sort of dry technique.
I went down there a couple of months ago with Keith Barron of Aurania and Erik Wetterling of the Hedgeless Horseman. They had seen Karratha but Egina and Beatons Creek were new to them. In Perth we went with Rob Humphryson to see a sorting machine being used and they are nothing short of remarkable. They were developed for the trash industry. You can separate plastics, glass and metals. They were able to pick up pin head size gold. Actually the most expensive part of the machine is the air compressor and air supply.The operating cost of the machines is less than $.50 per cubic meter sorted. So it’s going to be earth shaking. The big question has to be how much of the 2000 square kilometers is mineralized in an economical basis and the answer appears to be a lot. It will take a lot more testing but I think it might be possible to process 0.15 g/m gold at a profit.
Goldfinger: Okay, so that’s really big news about Novo. And if for those of us who have been following that company since 2017. I know you’ve been following it since its inception in 2009 but, even since 2017, we know that the C$4 per share price level is significant because that’s the level at which Kirkland Lake did the big $50+ million dollar financing with Novo at.
So that’s a psychological level for the stock. So it actually makes perfect sense that it rallied up to about $3.90 and then it pulled back a bit. Obviously it’s going to take some more news, some more good news, or some gold sector rally to get Novo above that $4 level.
Bob Moriarty: Yes, and to be fair and to be totally honest, there’s almost 200 million shares outstanding. So at C$4 per share, you’ve got somewhere between C$700 and C$800 million market cap, and that’s pretty rich for a company that’s not producing gold.
I think the next major milestone will be in April or May. I believe they will be producing at Egina even on a trial basis. That’s going to make them able to move forward. But, all of the progress, however has been very positive, about 15% of the gold is in small gold and should be recovered easily with either the Steinhart or the Tomra machine or a combination of both. And that small gold can be recovered without using water, which appears to be possible it will pay for all of the process it costs. There’s a lot of good news, there’s been good news for 10 years, I am saying the word about what I’ve said, I’ve followed this Novo since 2009 and it’s all true. They’ve got a giant gold deposit.
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Goldfinger: Yeah, I mean, if that is true and they are able to process this, this way, and they are able to get the permits and all of that. Then this is a unique gold project. I mean, it’s really one of a kind. And I think that’s why the story has been so controversial and also so hard for people to wrap their arms around, because there’s really nothing comparable to it.
Bob Moriarty: Well, here’s what’s crazy, it’s really three different one of a kind projects, okay. Now I said from the get go that you cannot measure nuggety gold and everybody came out and said you have to measure it. But you can’t measure it, you can only mine it. And they said, well you’ve got to do this and you got to do that and you got to do this. And I said, look, the Spanish didn’t have to do it and the Romans didn’t have to do that. If you can find it, just mine it. It is a unique project but the gold is there and mining nuggety gold is no different than mining dissemminated gold. If the grade is there, mine it.
Goldfinger: Exactly, so switching gears, we have had some news in the junior mining sector in the last few weeks. We have had some big news. Continental Gold was bought by Zijin Mining, I believe it’s spelled Z I J I N, a big Chinese gold miner for C$1.4 billion, basically at or very close to an all time high share price for Continental and in a rare all cash transaction, all cash, which in the mining sector we see a lot of all share or partial share transactions. Do you have any thoughts on Continental?
Bob Moriarty: Well, I know Continental, I knew that right from the get go, I was with Bob Allen when he vended those properties into Continental Gold. Their core asset is an extremely rich gold mine in Colombia. I think you are suggesting C$1.4 billion is cheap and actually, I think it’s expensive. Colombia has into turned a very difficult place to do business. I think if it was in Canada it would be worth twice as much. There are issues with the country and safety. They will go into production. The Chinese company, Zijin is so big that’s the issues will be meaningless to them. But that’s just a start of a lot of M&A in the industry. The majors have been consuming their young and that’s a very dangerous thing to do. There’s going to be a lot of takeovers taking place as gold goes higher.
Goldfinger: Yeah, I wasn’t saying that C$1.4 billion was cheap, but it was a modest premium to the market price. They didn’t really pay a lot over the market price.
But of course, Continental Gold shares had more than doubled in the last year. The market had obviously gotten a drop on that this was a likely event that Continental was going to get scooped up. And you are right, I mean, it’s a premium, high grade, large gold deposit, and the location is the only issue, like so many mining assets. So the location is the challenge. And you are right, if it was in North America, this would have been a $3 billion deal, or maybe even more. But in South America, specifically in this region of Colombia where there’s FARC terrorist activity, it’s dicey. And I think that’s why Newmont walked away from it and said, we will take our profit and you can have this project. I’m pretty sure that’s why Newmont walked away from it. I don’t know that for a fact, but it seems to me that Newmont was very enamored with the project for a while, the high grade nature of it and then they just decided that it was too risky for them.
Bob Moriarty: Oh, that’s absolutely 100% correct.
Goldfinger: Okay, so what else is driving the gold price right now? I mean, in my mind gold is oddly quiet right now. Just moving around $1460-$1470 not getting a lot of attention. And considering what is going on in the world and how we’re about to walk into this big election year in the US, it seems like the calm right before the storm.
Bob Moriarty: I think you’re correct, let me point out a couple of things out for you. The money that they said has poured into the system since the 16th of September is the canary in the coal mine. It is saying, “Something very bad is happening in the world financially,” my opinion is that it probably Deutsche Bank. I think the Deutsche Bank is a dead man walking and Deutsche Bank, to its undoing, it’s going to take me the entire world financing system down with it. And everybody wants to believe that is fear mongering but it shifts very quickly though. In 1932 there was an Austrian bank, it was a Rothschild bank, called the Creditanstalt that collapsed. They went bankrupt and managed to drag the entire world banking systems into bankruptcy since the assets and liabilities of all the banks were so intertwined.
Deutsche Bank is going to do the same thing. But behind the scenes, and that’s very interesting, I’m interested in your take on this. If you look at the COTs, people were way too bullish on gold and typically there would be a big correction in gold when you’ve got record high numbers for outstanding contracts. We are not seeing a big correction. We have seen a very minor correction. Something is going on in the gold market, and I think it’s big money is headed to safety in gold.
Goldfinger: I think you’re right about that, and also it’s interesting to know that there was a big call option transaction on gold. I don’t know if you saw it, but June 2021 call option for $4,000 per ounce gold buyers spent $1.5 million to buy call options on gold. Did you see that bump?
Bob Moriarty: I think that a few people, not a very few people, but a few people recognize the systemic dangers of the world’s finances system and they are saying we see it happening soon. Anybody betting on $4,000 gold, it’s saying they feared greatly what is going to happen. Eric Sprott is essentially doing same thing, putting it kind of commodity into juniors and especially silver. He thinks you will see prices going far higher.
Goldfinger: Yeah, I mean, it seems crazy, who would put $1.5 million into options for a gold price? Yes, for a gold price of $4,000 when gold is $1,470 but if you think about it, there are institutions, there are players in the market who 1.5 million is just like a tip at a restaurant, to them. It’s really nothing and look at the reward, it’s tremendous. In June 2021 we don’t know the future. That’s 18 months from now. There are events that could transpire over the next year and a half that could easily send gold over $4,000 right?
Bob Moriarty: Well, mathematically, it’s actually a bad bet. If you go back to 2008 and to AIG that sold, potentially put options on Credit Default Swaps betting they would not default. And the funny thing is the CDS did default and the government bailed AIG. A large part of the danger to the world’s entire financial system is that the FED and Treasury didn’t allow the system to work the way it should. We socialized losses but allowed profits to go to the financial firms that caused the problem in the first place.
Goldfinger: So you are saying that it’s a bad bet for the seller of the options or the buyer?
Bob Moriarty: For the buyer, here is the key and that’s what people do not understand about derivatives. If you own a hundred ounces of gold, that’s not a derivative. If you sell a put or a call on that 100 ounces of gold, those are derivatives. When the casino gets so big that people are making enormous size bets, which is what they did in 2008 the risk is no longer gold going up or gold going down it becomes counter party risk. Default or not defaulting the biggest risk is counter party risks? If I’m correct when derivatieves in the banking system blow sky high, a lot of people are going to learn that you can bet on gold going to $4000 and the S&P to zero, be 100% right and still lose money.
Goldfinger: Okay, so that’s a fair point. I get the point that you are making and that’s that the person on the other side of that $1.5 million in option premiums might not make good on the gold because that’s essentially what the call option is. The buyer, the call option has the rights between now and the third week of June 2021 to buy however many ounces of gold at $4,000 an ounce. It does not matter what the gold price is, if gold is $4,100 gold is $4,900 gold is $20,000 the owner of those options has the right to buy however many ounces that’s. I think it was like 50,000 or 500,000 ounces at $4,000 an ounce. And the other person on the other side has to give them the gold for that price, $4,000 an ounce. And that’s how an option transaction basically breaks down.
But the counterparty to that has to either be a major investment bank or a major gold miner because they would not… a regular person, you or I, even somebody with pretty high net worth like $10 or $20 million, could not take the other side of that trade because the exchange would not allow them to sell calls for that much gold unless they had vast resources or they knew they were a gold miner who was mining the gold ounces, right? So you are saying that basically the counter party or you know, risk is the problem. But what happens if the counterparty does not make good on the gold? Can you imagine what the market would be like if somebody failed to make good on their side of the gold options trade? The gold price would probably be well over $4,000.
Bob Moriarty: Yeah, where were you? Some gold options trade because that’s what people are most familiar with, but the fact is the real issue is going to be subprime loans, just subprime auto loans and for subprime mortgages and student debt. Something like 61 percent of automobile loans are now subprime. The numbers are just staggering and I read that seven million Americans are more than 30 days behind on their car payments. The systemic risk in the financial system today is enormous. The government is out of bullets. Europe already has negative interest rates. That kills both savers and the banks. AIG was in effect selling puts for a nickel. Okay, but they were risking a dollar. It took the federal government to come in and bail out AIG and we should not have bailed them out. We should have let them collapse.
Goldfinger: Yeah, that was quite a racket that was going on back then.
Bob Moriarty: It’s still going, it’s worse today.
Goldfinger: How do you know that it’s worse?
Bob Moriarty: Because, all of the numbers are worse. If you take a look at the student debt, if you take a look at the subprime automobile loans, if you take a look at credit card debts, if you take a look at CLO’s, we have so much debt in the world, that’s not backed by anything. The $250 trillion in debt in that cannot get paid mathematically, period. You can argue, anyone can argue whatever they want. Maybe it will be written off in a jubilee but mathematically it can not be paid therefore, at some point it has to blow up. Now nobody talks about derivatives much anymore, but it’s still $500 trillion. It’s still totally out of control.
Goldfinger: But is this not what always happens in cycles when the economy is sort of humming along, the economy is growing, jobs are growing, stock market is making new highs. People borrow more, spend more and they always extrapolate. That the good times are going to keep going forever because that’s the way it’s been for the last few years. They just assume that things are always going to keep improving. And then there’s something unforeseen that takes place and the economy stops growing. It might even slow down and go into a recession and then jobs are cut, people are laid off and then people do not have the income to pay their debt and then that’s when things really get bad, right? I mean, is not that the way the economy goes constantly in these cycles?
Bob Moriarty: Yeah, of course, I mean, the key is to understanding it’s not complex. Life works in cycles. Now we have a longest stock market boom in history and all you need to know we have the longest stock market boom in history. What is going to happen next?
Goldfinger: Well, at some point we’re going to have a deep pull back. Something like 20% or we’re going to have a crash like in 2008 but you don’t know when, right?
Bob Moriarty: Yeah, exactly.
Goldfinger: It could happen next week or it could happen 10 years from now.
Bob Moriarty: No, for example, gold hit it low in 1999 and it went up continuously in 2011 so you had a gold bull market for 12 years. What happens at the end of a bull market?
Goldfinger: Well, at the end of a bull market, there’s a phase of distribution that takes place and then there’s a sharp drop and the bear market starts.
Bob Moriarty: The end of the end of a bull market, you’ve got a crash. Okay, every time.
Financial markets run in cycles due to human nature. But when you go past the longest gold bull market in history you are going to have a decline. Same with the longest stock market in history you can look forward to a decline. You know it’s going to happen, you just don’t know when but, to actually say it’s to go on for 10 years, that would be an extreme stretch. It’s already the longest in history. It has one foot on a bannana peel and the other foot in the grave.
Goldfinger: Yeah, but the thing is that I think this is a really important point, at the end of a bull market there’s not always a crash. It’s not like one day the bull market ends and stocks are down 10% the following day. It’s not always like that. Sometimes the bull market slowly peters out and share prices start to wedge, lower steadily, and then there’s a big drop. So we don’t know exactly when the bull market ends unless we’re in the future and look back on it. We never know in the moment that this is it. We never know that. And often there are big down days and people are like, this is it. And then we’re making new highs three weeks later and that wasn’t it. That was just a little short term panic, right?
Bob Moriarty: That’s absolutely correct, my point is everything goes up and everything goes down. So if something is gone up for a long time, eventually it’s going to go down. How it goes down is meaningless. It’s not particularly important. But if you’ve seen that record length, stock market, you are probably going to have a record length stock market decline.
Goldfinger: Okay, so turning to the junior mining sector, so you know we have talked about Novo already. Are there any other companies that you would like to mention that have really caught your attention? I know you like Lion One. We did. We did discuss that in the past. Are there any other ones that you think are worth talking about here?
Bob Moriarty: Yes, now that you mention it everybody seems to recognize tax loss selling season from November well into December. Many stocks decline during this period regardless of fundamentals and that makes it a good time to buy. So now it’s a good time to buy across the board. But there’s three stocks that I can think of that are going to have news out shortly that I think could be very significant.
Lion One I’ve got to mention because they drilled some deep holes, these deep holes Quinton Hennigh suggested they should drill. They got ahead and did it. They found visible gold, they could have results out as early as this week. If it’s not released by the end of the week it won’t come out until January. It nevers makes any sense to release news after the 20th of December because of the holiday chaos.
But Lion One could have extraordinary results coming out. There is another company called GFG Resources that has the Rattlesnake project in Wyoming that they are in a JV with Newcrest. Newcrest managed to drill an 1809 meter drill hole, which is pretty significant all by itself. Rattlesnake was the project that Quinton Hennigh picked up when he was running Evolving Gold twelve years ago.
He wanted to drill that 1800 meter program but his board of directors wouldn’t do it. Those results could be out this week, or should be out the first two weeks of January and they could be very significant. And Irving has drilled at the Omui Mine and those who could be out this week or could be out first two weeks of January. So, those three companies offer what could be extraordinary news in the next month.
Goldfinger: You know, we have not heard from Irving (CSE:IRV) in a while what is taking so long?
Bob Moriarty: Irving is another really funny situation. I don’t know how Quinton manages to find these projects like this. There has not been any gold mining since 1943 in Japan and they’ve got to reinvent the wheel. Something that’s as simple as cutting the core can be very difficult to do because in Japan, you’ve got to hire an officially certified core cutter. So things that in Nevada will take weeks, take months to do and they’ve got to box and ship the core for Australia for assay. So it really takes two to three months to get what you could do in Canada or Nevada in a couple of weeks. Investors get frustrated.
Goldfinger: Wow, two to three months and that’s just because of how challenging it is to drill and log and cut the core and then it has to be shipped to Australia.
Bob Moriarty: I can not give you any direct analysis. I love the Japanese, I love Japan, I think they are wonderful people. But if you think of mining in Japan and drilling in Japan, we literally have to reinvent the wheel. They have to bring drillers and a drill in from Canada. They have got to ship the core to Australia and of course everybody in Australia is busy as hell due to the increase in the price of gold. So the news is there, it just takes a long time to get out.
Goldfinger: You know I wrote a tax loss buying opportunities post, which you linked to on 321 Gold. And I mentioned six companies in the post and they all shared similar themes in terms of being down recently or near 52 week lows and they’ve all been seeing insider buying, recently. I also like the catalysts that are coming up for some of these companies. I’ll just name off the six and you tell me if you’ve any thoughts on any of them. The first one is Acat (TSX-V: ATC), the second is Cantex (TSX-V:CD). The third one is Core, Canadian Orebodies (TSX-V:CORE). The fourth one is Fireweed Zinc (TSX-V: FWZ). The fifth one is Northern Shield (TSX-V:NRN) and oh, I skipped one, then there’s Skyharbour Resources (TSX-V:SYH), which is a uranium explorer, but I know that you do not like that sector.
Bob Moriarty: Let me say categorically. If an investor is willing to do some research, you can make a lot of money from December into February looking for stocks that are at yearly lows and buy htem while they are cheap. Now, I know ATAC and I visited them years ago and they have great projects and have good management and I’ve never understood why the company hasn’t gotten traction but they will. Fireweed is another company that I’m intimate with and I will state categorically, there’s going to be an enormous shortage of zinc and copper and nickel. If you can find good companies in those spaces, everyone will be quite surprised by what happens to the price and that’s true of all three metals.
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Goldfinger: That’s good stuff. I just want to end this month’s interview with, just talk a little about what I’ve learned in 2019, and see if it matches with what you’ve learned or what you think about investing. I think I’ve learned that the most important thing aside from the big macro trends, obviously the overriding dominant driver are the big macro themes.
And so when the sector goes into a bull market or a bear market, you do not want to fight it either way. You want to go along for the ride whichever way it’s going. But second to that is share structure and who owns the shares. If you can understand who is holding the shares and what their motives are, and get into companies with good share structures. An example would be Irving.
An example would be Aurania. These are not cheap stocks. These are expensive stocks but they are expensive for a reason because they’ve got very good share structures and very good management and very good holders of the shares that aren’t flipping the stock on a daily basis and trying to make 10 cents or five cents or something.
There’s long-term holders that are holding these shares for much bigger gains down the road. I’ve learned in 2019 that that is really the most important thing. Because at the end of the day, the share price is determined by the supply of shares and then the buying pressure, and then they meet and they create the share price.
If there’s tons of supply of the stock, it’s never going to really go up unless they hit 10 million ounces at 10 grams or something, right? But if there’s a scarcity of shares, there’s not a lot of shares available and there’s some buying pressure, the share price is always going to stay firm.
Bob Moriarty: You’ve gotten very close to two extremely important points that every investor needs to understand. All markets go up and all markets go down. In a gold bull market, everything goes up, in a gold bear market everything goes down. It has nothing to do with the commodity, it has nothing to do with management, it has nothing to do with interest rates.
You’re either in a bull market or you’re in a bear market. In 2011 until 2015 nothing went up. The great stocks in the resource sector went down. And that’s a generalization but it’s more or less true. But one of the things that you’re missing, I think this is ultra important, gold shares compared to the price of gold are lower relative to the price of gold than they have been for 70 years.
I believe that we’re going to go into a gold bull market in both gold and in shares. It’s going to turn it into a giant bubble. And the time to buy was any time from December in 2015 until now, but there will come a time to sell but, we’re going to go into a bull market that no one has seen in their lifetime.
Goldfinger: So we’re going to go into a bull market that nobody has ever seen in their lifetime?
Bob Moriarty: Yes, it’s a little tiny door and when everybody tries to squeeze through it, they are going to be shocked, at (1) how many people are trying to get through the door, and (2) how small a door this is, this is a little tiny market.
Goldfinger: I think that’s a great concluding point for this month’s interview. I do want to mention two more companies just to see if you’ve any thoughts. We have talked about ATAC, in the Yukon. Also, two companies I’ve been covering recently are Banyan Gold (TSX-V:BYN) and Victoria Gold (TSX-V:VIT). Victoria Gold is a large open pit heap leach project called the Eagle Gold Mine in the Yukon in the Mayo Mining District.
And then there’s Banyan which is an exploration stage gold junior with two projects in the Yukon. It’s funny because the CEO of Victoria (John McConnell) is married to the CEO of Banyan (Tara Christie). Banyan Gold is a tiny little explorer that has a project right near Victoria Gold’s project and Alexco Resources, the big silver company in this Mayo mining area of the Yukon. I like both of them. Obviously they’re very different companies. Victoria Gold is about a C$450 million market cap and they’re pouring gold as we speak. They’re going to produce 220,000 ounces of gold a year at a US$774 all-in sustaining cost. And Banyan is still in the exploration phase, but it’s a tiny C$6 million market cap as opposed to a C$400+ million market cap for Victoria. Do you have any thoughts on those two?
Bob Moriarty: Okay, Tara Christie is my favorite miner in Canada. She runs Banyan. I think she’s just wonderful. I’ve known her for over ten years and I know her family, she’s just great. And I knew her when she was single and then she married the fellow who runs Victoria. She will succeed, she is the best in the business.
Yeah, they’re going into production (Victoria Gold). I don’t think their timing could possibly be any better than it is. And certainly Tara Christie’s my favorite mining person in Canada. So, I hope Banyan succeeds.
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Goldfinger: Yeah, I think at a C$6 million market cap and a project that’s sandwiched in between two much larger companies with a big land package, in a gold bull market you could do pretty well. It could definitely be a 10-bagger from five cents a share.
Bob Moriarty: Or much more than a 10-bagger.
Goldfinger: Exactly! Bob, I’d like to thank you for your time and insights, I really enjoyed this conversation. I wish you Happy Holidays and I look forward to catching up in the new year!
Disclosure: The author of this article owns shares in ATC.V, BYN.V, CD.V, CORE.V, FWZ.V, NRN.V, SYH.V, and VIT.V at the time of publishing and may choose to buy or sell at any time without notice.
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